(Market Watch 3/17/21)

Dow Up 160 Points As Stocks Turn Higher After Fed Policy Announcement

Stock-market investors reacted positively to the Federal Reserve's policy announcement, erasing losses or extending minor gains after the central bank signaled it expected no change in interest rates through 2023 even as inflation slightly overshoots its target. The Dow Jones Industrial Average jumped as much as 200 points at its high and remained up around 160 points.

(Bloomberg 3/17/21)
Greenback Extends Broad Drop Ahead of Powell on Rate Outlook

The greenback is at a session low ahead of Fed Chair Jerome Powell’s press conference as traders sell the dollar on expectations the central bank will be on hold for the foreseeable future.

The Bloomberg Dollar Spot Index is -0.3%; commodity and emerging market currencies leading gainers; yields rise

EUR/USD is +0.5% at 1.1958 after stops are triggered above the key pivot level of 1.1952, the Feb. 5 low; eyes double top ahead of 1.20
USD/JPY erases advance and trades at 108.95

(Bloomberg 3/17/21)

UST 5s30s Curve Steepens 10bp Toward 2021 High, Most in a Year

Treasury yield curve is sharply steeper in response to Federal Reserve message being articulated by Chair Powell following FOMC decision, widening 5s30s spread by 10bp, its biggest increase in a year. Front-end and intermediate yields are falling as Powell sounds dovish tones, saying it’s premature to discuss tapering asset purchases and that an announcement on SLR exemption is planned in the coming days.

Five-year yield declined as much as 6.5bp to 0.764%, while 30-year remains nearly 5bp higher on the day at around 2.42%; 5s30s curve touched 166.3bp, within 1bp of its 2021 high on Feb. 24

10-year yield briefly erased an increase of as much as 7bp to 1.689%, the highest level since January, reached before the FOMC decision; 10-year futures are near best levels of the day around 132-06

Gains led by belly of the curve richened the 2s5s10s fly by 9bp on the day while 2s10s spread exceeded 150bp for the first time since 2015

Long-end lag reflects focus on inflation outlook, and steepening of 5s30s curve by more than 10bp is largest one-day move since March 17, 2020, during the liquidity crisis

(Bloomberg 3/11/21)

Euro Fades, Bond Yields Dip as ECB Signals Faster Bond Purchases

The euro dipped from the day’s highs and German 10-year bond yields declined after the European Central Bank indicated it will step up the pace of purchases under its PEPP program over the next quarter. Rates were kept unchanged as expected.

(Bloomberg 3/4/21)

OPEC+ decided to keep a tight limit on oil production next month, sending prices soaring in a market that had been expecting additional supply.

The agreement is a victory for Saudi Arabia, which has consistently pushed to tighten the market. It leaves the world facing a significant supply squeeze, higher energy costs and the risk of inflation just as widespread vaccination allows economies to emerge from the Covid-19 downturn.

The cartel had been debating whether to restore as much as 1.5 million barrels a day of output. But after being urged to “keep our powder dry” by Saudi Energy Minister Prince Abdulaziz bin Salman, members agreed to hold steady at current levels -- with the exception of modest increases granted to Russia and Kazakhstan.
In a briefing after Thursday’s meeting, the prince went one step further by making the kingdom’s additional 1 million barrel-a-day production cut open ended. He gave no date for phasing out the voluntary reduction and told reporters he is in no hurry to do so.

Russia and Kazakhstan secured exemptions from the deal, allowing them to boost output by 130,000 and 20,000 barrels a day in April, respectively, “due to continued seasonal consumption patterns,” according to a statement posted on OPEC’s website. The two nations were granted similar allowances for February and March.

Policy Validation

(Bloomberg 3/5/21)

China set a conservative economic growth target that signals more restrained monetary and fiscal policies this year, in contrast to other major nations still pumping in stimulus to support growth. The government set a growth target of above 6% for the year, well below what economists forecast, and will narrow the
budget deficit to 3.2% of gross domestic product, Premier Li Keqiang said Friday at the opening of the National People’s Congress. While the fiscal gap is lower than last year, it’s above the 3% expected by many analysts, signaling Beijing still
sees a need for spending to support the recovery. “A target of over 6% will enable all of us to devote full energy to promoting reform, innovation, and high-quality
development,” said Li.

(Bloomberg 3/2/21)

Treasuries Firm; Brainard Says Last Week’s Swing ‘Caught My Eye’

Treasuries continue to trade with a bid tone across belly of the curve, which extended outperformance as Federal Reserve Governor Lael Brainard sounded a dovish tone concerning last week’s bond market volatility.

Outperformance by intermediate sectors tightened 2s5s10s fly by 4.5bp on the day as 5-year yields shed 2.5bp outright Treasury 10-year note futures are near session highs, with yields slightly richer vs Monday’s close, while 30-year yields remain ~2bp cheaper on the day
Brainard said she’s paying close attention to market developments and that the speed of last week’s moves caught her eye

Around the same time Fed’s Daly said the central bank needs to be patient in implementing its new monetary policy strategy


Policy Validation

(Bloomberg 3/2/21)

Brainard Says Recent Bond Market Moves Have ‘Caught’ Her Eye
Fed governor cites improving outlook while noting risks remain
Says economy remains far from Fed’s goals for inflation, jobsBy Craig Torres

Federal Reserve Governor Lael Brainard said it will take “some time” to meet the conditions laid out by the U.S. central bank for reducing the pace of its massive bond purchases, while noting recent bond market volatility.

“I am paying close attention to market developments,” she said Tuesday in response to a question after giving a speech. “Some of those moves last week, and the speed of the moves, caught my eye. I would be concerned if disorderly conditions or of a persistent tightening in financial conditions that could slow progress towards our goal.”

(Bloomberg 3/2/21)

Treasuries Firm; Brainard Says Last Week’s Swing ‘Caught My Eye’

Treasuries continue to trade with a bid tone across belly of the curve, which extended outperformance as Federal Reserve Governor Lael Brainard sounded a dovish tone concerning last week’s bond market volatility.
Outperformance by intermediate sectors tightened 2s5s10s fly by 4.5bp on the day as 5-year yields shed 2.5bp outright
Treasury 10-year note futures are near session highs, with yields slightly richer vs Monday’s close, while 30-year yields remain ~2bp cheaper on the day

Policy Validation

(MarketWatch 3/2/21)

Fed's Brainard expresses unease about last week's bond market turmoil

Size and speed of last week's bond market selloff caught her eye, Fed Governor says
Federal Reserve Governor Lael Brainard on Tuesday became the first top official at the central bank to express unease about last week's sharp rise in longer-term U.S. Treasury yields.
Asked about the bond market during a talk at the Council of Foreign Relations, Brainard said she was "paying close attention to market developments."
"Some of those moves last week and the speed of the moves caught my eye," Brainard said.
"I would be concerned if I saw disorderly conditions or persistent tightening in financial conditions that could slow progress" towards the central bank's twin goals of a strong labor market and stable 2% longer-run inflation.

Policy Validation

(Bloomberg 2/23/21)

*POWELL: RATES ARE MOVING UP DUE TO HIGHER GROWTH EXPECTATIONS
*POWELL: LOOK AT BROAD RANGE OF CONDITIONS, INCLUDING YIELDS
*POWELL: MOVE IN YIELDS REFLECTS MORE CONFIDENCE IN THE ECONOMY
*POWELL: EXPECT US TO MOVE CAREFULLY AND PATIENTLY OVER TIME
*POWELL: THERE'S LONG WAY TO GO, WE'RE 10M JOBS BELOW PRE-VIRUS

Policy Validation

Bloomberg 2/23/21

Powell Signals Continued Fed Aid for Economy He Sees Improving
By Rich Miller
Federal Reserve Chairman Jerome Powell signaled that the central bank was nowhere close to pulling back on its support for the pandemic-damaged U.S. economy even as he voiced expectations for a return to more normal, improved activity later this year.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said in the text of testimony to be delivered Tuesday to the Senate Banking Committee.

(Bloomberg 3/19/21)

The Bank of Japan unveiled a set of carefully crafted policy tweaks aimed at giving itself more flexibility to keep up its long quest to revive inflation.

The bank set out a wider-than-previously-thought movement range for bond yields and scrapped a buying target for stock funds at the end of a three-month policy review.
While the currency and bond markets largely took the moves in stride, the BOJ’s decision to focus its purchasing of exchange-traded funds on the wider Topix index drove down shares on the Nikkei 225.

Many of the tweaks will give the BOJ greater scope to buy fewer assets and could be viewed as a stepping back from stimulus, but the central bank characterized the changes as shoring up the effectiveness and sustainability of its measures over the longer run.

Policy Validation

(Reuters 2/12/21)

ROME — Finance ministers from the Group of Seven (G7) rich nations have committed to continuing coordinated action to support the economy, Italian Economy Minister Roberto Gualtieri said on Friday.

“G7 ministers confirmed today their common and coordinated commitment to support the recovery and to set the conditions for a sustainable and inclusive growth. The withdrawal of policy support is premature,” he wrote on Twitter after an online call with his G7 peers.

(National Post 2/12/21)

Japan's Aso: G7 finmins discussed support for low-income countries

Financial leaders from the Group of Seven (G7) rich nations discussed support for low-income countries and new allocation of special drawing rights at the International Monetary Fund (IMF) in a virtual meeting, Japanese Finance Minister Taro Aso said on Friday.

Aso was speaking to reporters after attending Friday's online meeting with his G7 peers under the United Kingdom as new chair.

(Bloomberg 2/12/21)

In her first call with foreign counterparts and central bankers from the G-7, Yellen said that “the time to go big is now” and that the group should focus on how to help the economy, the U.S. Treasury Department said in a statement after the virtual meeting held on Friday. The U.K. is the rotating head of the G-7 this year.
The U.S. is leaning toward backing an increase in the IMF’s special drawing rights by as much as $500 billion, Bloomberg News reported earlier this month. The fund has been lobbying for more help to support developing nations against the Covid-19 crisis. A decision could come as soon as this month.

Policy Validation

FT 2/10/21

Jay Powell stressed the importance of “patiently accommodative” monetary policy to support the struggling US labour market, warning that achieving full employment in the world’s largest economy will not be easy. In prepared remarks to the Economic Club of New York on Wednesday, the chair of the Federal Reserve said US employment was far from its pre-pandemic level. He did not reveal any anxiety about a rise in inflation later this year triggered by President Joe Biden’s $1.9tn fiscal stimulus plan. “Despite the surprising speed of recovery early on, we are still very far from a strong labour market whose benefits are broadly shared,” Powell said. “Employment in January of this year was nearly 10m below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath.” Powell also indicated that US policymakers, including health officials, fiscal authorities and central bankers, would still have plenty of work to do in order to close that gap, suggesting the Fed did not see a quick end in sight to the economic downturn triggered by the pandemic.

Policy Validation

(Dow Jones 2/11/21)

Fed's Daly Sees Central Bank Maintaining Its Bond-Buying Pace Through 2021

Federal Reserve Bank of San Francisco leader Mary Daly said the U.S. central bank is unlikely to pull back on its bond-buying stimulus this year, and that another round of government aid shouldn't overheat the economy.
The official said she continues to expect the U.S. economy to pick up speed over the second half of the year, as vaccinations roll out and allow the economy to emerge from the shadows of the coronavirus pandemic. But even as the nation emerges from the crisis, it won't yet be time for the central bank to pull back on its $120 billion a month in bond buying, she told The Wall Street Journal on Wednesday.

"For now, we have policy in a good place," Ms. Daly said. "If you take the lens of my modal outlook, then it's really continuing to purchase at the current pace through the end of this year."

(Bloomberg 2/16/21)

China is exploring whether it can hurt U.S. defense contractors by limiting supplies of rare-earth minerals that are critical to the industry, the Financial Times reported. Industry executives said government officials had asked them how badly companies in the U.S. and Europe would be affected if China restricted rare-earth exports during a bilateral dispute, the FT reported, citing people it didn’t identify involved in the consultation.

Policy Validation

“The committee has said we are going to wait for further progress on our goals. I gave a rosy outlook today but it’s only an outlook. I would definitely want to see whether this materializes or not before getting into any adjustments to policy”

“The chair has wanted to start that conversation only when it’s appropriate and not get ahead of ourselves even though we do have high hopes the pandemic will come to an end”

Bullard speaks with reporters Thursday after giving presentation on the economic outlook

Policy Validation

(Bloomberg 1/29/21)

PBOC Says Market Talk of SLF Rate Hike ‘Untrue’

PBOC says it has noticed the rumor about potential SLF rate hike and has reported it to the police, the Chinese central bank says in a reply to Bloomberg News.

China's central bank on Friday conducted 100 billion yuan (about 15.45 billion U.S. dollars) of reverse repos amid rising fiscal expenditure at the end of the month.

The move aims to maintain reasonably ample liquidity in the banking system, according to a statement on the website of the People's Bank of China.

The interest rate for the seven-day reverse repos was set at 2.2 percent, the central bank said.
With 2 billion yuan of reverse repos maturing on the same day, the move led to a net liquidity injection of 98 billion yuan into the market.

Policy Validation
(From Chair Powell's press conference 1/27/21)

You know, in terms of tapering, it's just premature. We just created the guidance. We said we want to see substantial further progress toward our goals before we modify our asset purchase guidance. It's just too early to be talking about dates. We should be focused on progress that we'll need to see actual progress. When we see ourselves getting to that point, we'll communicate clearly about it to the public. So nobody will be surprised when the time comes. We'll do that well in advance of actually considering what will be a pretty gradual taper. >> If I might, your policies are working and you can do more, the question is can you stop doing it when it's time? >> Chairman Powell: Yeah. So I was here -- we had all the same questions back in -- after the global financial crisis. We raised interest rates, we froze the balance sheet size and slang the balance sheet -- shrank the balance sheet size. We can do that again. We learned a lot from that experience. We understand as we understood then, but even more so we understand the way to do is it communicate well in advance, do predictable things and move gradually. We're going to be transparent. But honestly, the whole focus on exit is premature if I may say. We're focused on finishing the job we're doing, which is to support the economy, give the economy the support it needs. There are people out there who have lost their jobs. It's essential we get them back to work as quickly as possible. We want to do everything we can to do that and that is our primary focus right now. It's too soon to be worried about that. When we come to exit, we have an understanding of how to do that and we'll do it very carefully but in the meantime our focus is giving the economy the support it needs.